The account type and normal balance of Prepaid Expense is a revenue credit b

accounts

Since it is a current asset, it has a normal debit balance as all the current assets have. It increases with the debit while decreases with the credit. Generally, Prepaid Insurance is a current asset account that has a debit balance.

asset account

Prepaid items are those items that are paid for in advance. When a cost is incurred, an asset account is debited to show the service or benefit that will be received in the future. Prepayments often occur for such items as insurance, rent, supplies and advertising.

What type of account is Prepaid Insurance? a. asset b. liability c. equity

Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. The company purchases $500 of supplies from a vendor and receives an invoice, but doesn’t pay the invoice yet. Tim is a Certified QuickBooks Time Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience.

  • For example, when making a transaction at a bank, a user depositing a $100 check would be crediting, or increasing, the balance in the account.
  • The main advantage of prepaid insurance is that companies occasionally pay bills in advance to gain a discount.
  • The unadjusted trial balance is a trial balance where the accounts have not yet been adjusted.
  • Is the Fees Earned account classified as an asset, a liability, an owner’s equity, a revenue, or an expense account?
  • Work completed in 2010 and billed to customers for which cash had not yet been received by year-end amounted to $ 40,000.

Doing so records the incurring of the expense for the period and reduces the prepaid asset by the corresponding amount. BlackLine and our ecosystem of software and cloud partners work together to transform our joint customers’ finance and accounting processes. Together, we provide innovative solutions that help F&A teams achieve shorter close cycles and better controls, enabling them to drive better decision-making across the company.

Financial Accounting

To determine the correct normal balance, identify the accounts affected by a transaction, which category each account falls into, and whether the transaction increases or decreases the account’s balance. This transaction will require a journal entry that includes an expense account and a cash account.

What type of account is prepaid revenue?

Prepaid income is considered a liability, since the seller has not yet delivered, and so it appears on the balance sheet of the seller as a current liability.

Recall that prepaid expenses are considered an asset because they provide future economic benefits to the company. The initial journal entry for a prepaid expense does not affect a company’s financial statements.

The Adjusting Process And Related Entries

The initial journal entry for prepaid rent is a debit to prepaid rent and a credit to cash. Prepaid expenses are initially recorded as assets, but their value is expensed over time onto the income statement. Unlike conventional expenses, the business will receive something of value from the prepaid expense over the course of several accounting periods. On July 1, the company receives a premium refund of $120 from the insurance company. The company records the refund with a debit to Cash and a credit to Prepaid Insurance. At December 31, the balance in Prepaid Insurance will be a credit balance of $120, consisting of the debit of $2,400 on January 1, the 12 monthly credits of $200 each, and the $120 credit on July 1. Prior to issuing the December 31 financial statements, the company must remove the $120 credit balance in Prepaid Insurance by debiting Prepaid Insurance and crediting Insurance Expense.

Information presented below walks through specific accounting terminology, debit and credit, as well as what are considered normal balances for IU. The adjusting journal entry is done each month, and at the end of the year, when the insurance policy has no future economic benefits, the prepaid insurance balance would be 0. The adjusting journal entry is done each month, and at the end of the year, when the lease agreement has no future economic benefits, the prepaid rent balance would be 0. Prepaid rent—a lease payment made for a future period—is another common example of a prepaid expense. An organization makes a cash payment to the leasing company, but the rent expense has not yet been incurred, so the company must record the prepaid rent. Prepaid rent is an asset because the prepaid amount can be used in the future to reduce rent expense when incurred.

Accruing Interest Expense

The process to ensure that all accounts are reported accurately at the end of the period is called the adjusting process. The expense would show up on the income statement while the decrease in prepaid rent of $10,000 would reduce the assets on the balance sheet by $10,000. Most prepaid expenses appear on the balance sheet as a current asset unless the expense is not to be incurred until after 12 months, which is rare. Once expenses incur, the prepaid asset account is reduced and an entry is made to the expense account on the income statement.